Question

Value-Stream Product Costing, ABC, and DBC

Brasher Company is transitioning to a lean manufacturing system and has just finalized two order fulfillment value streams. One of the value streams has two products, and the other has four products. The two-product value stream produces precision machine parts and the four-product value stream produces machine tools. Before moving to the value-stream structure, Brasher had a well-developed ABC system (one that used all duration drivers) and had experienced good success with the more accurate product costs. Management wanted to be sure that the average costing approach of value-stream costing did not produce distorted product costs. Accordingly, expected weekly activity data were provided for the two-product value streams to see how well average costing worked (see below); however, management did not want to continue using ABC because of its intense data demands and the cost of updating as changes unfolded due to lean practices. In the table below, the driver for each activity is a duration driver. Order processing, for example, uses hours available for processing orders; purchasing uses hours available for processing purchases, etc.

Machine Parts Value Stream

For the Coming Week

                                   Conversion      Part M15        Part M78    Total Activity

Activity                          Cost         (hours used)   (hours used)         hours

Order processing          $ 36,000           600                  1,800               2,400

Purchasing                      72,000           200                    300                   500

Lathe                               108,000         480                  320                   800

Milling                            200,000           800                  1,200               2,000

Drilling                           144,000           720                  1,680               2,400

Assembly                          40,000        1,200                    800               2,000

Inspection                        20,000           800                     200               1,000

Shipping                          18,000            600                     200                  800

Invoicing                         32,000             700                      800                1,500

Totals                          $670,000            6,100                  7,300            13,400

During the week, the machine parts value stream expects to produce and ship 10,000 units of M15 and 30,000 units of M78. Since materials cost is calculated separately, the main concern is with the unit conversion cost.

Required:

1. Calculate the average unit conversion cost for the two machine parts.

2. Calculate the conversion cost per unit for each part, using ABC. Comparing ABC unit cost with the average cost, what would you recommend?

3. Calculate the conversion cost per unit, using DBC (first calculating the cycle time for each product). Based on this outcome, what would you recommend to the management of Brasher Company?

Answer 1